“Stocks are weighted according to both their market-capitalization and the strength of their value characteristics, rescaled to maintain sector neutrality,” writes Alex Bryan, an equity strategist for Morningstar. “This approach allows the fund to maintain a deeper value tilt than many of its market-cap-weighted value index peers, despite having greater exposure to traditional growth industries.”

Specifically, VLUE screens a stock’s value relative to sector peers, so stocks from varying sectors are placed on a level field, according to Bryan. For example, a tech stock that looks cheap relative to its sector peers could pass VLUE’s screens, whereas an energy stock with even lower absolute valuations may not pass the test.

“Valuations may be more comparable within the same industry than across industries, which may give the fund cleaner exposure to stocks that are truly cheap relative to their peers,” Bryan added.

While the sector-neutral approach may help shield an investor against unintended exposure, VLUE will be more exposed to prevailing market moves – if a sector is richly valued, the ETF could have a greater tilt toward the area than other market-cap-weighted value indices. Additionally, VLUE does not necessarily go bottom fishing with downtrodden sectors.